Simon Hawker, IFA St Albans - Are you close to your pension Lifetime Allowance?

Thursday 22 February, 2018

Simon Hawker, independent financial adviser (IFA) and member of the St Albans financial planning team recommends you act now and get pension advice if the value of your total pension plans is close to the Pension Lifetime Allowance - currently £1 million.

What is the Lifetime Allowance? 

The Lifetime Allowance is the limit on the amount of pension benefit that you can withdraw from all your pension plans as a lump sum or as regular retirement income without paying an extra tax charge.  

The Lifetime Allowance was introduced in 2006 at £1.5 million and it increased to £1.8m in 2010, but the government has since reduced it to £1.0 million in April 2016.  It will increase to £1.03 million in April 2018 and it is then due to rise in line with the consumer prices index each year.  

What pension plans are included in calculating the Lifetime Allowance?

All your pension schemes are included in calculating the Lifetime Allowance.  These include either defined contribution pension schemes (money purchase pension schemes) or final salary pension schemes (defined benefit pension plans). 

How do you calculate the Lifetime Allowance?

To work out the total value of your pension plan at retirement which shows how close your pension savings are to the Lifetime Allowance add up the current value of your defined contribution pension schemes and any final salary pension schemes. To work out the value of your defined benefit pension schemes (final salary pension schemes) multiply the projected amount of income you will receive annually from these pensions at your retirement date. This should then be multiplied by 20 times to give an estimated total pension plan value.  This is easy to do if you have already left your employer as you will know your final salary and will have information about your projected pensionable income at retirement.  

If you are still working and want to estimate your final salary pension read Neil Homer – Does your final salary exceed the Lifetime Allowance?

How will I be affected if I have more than £1 million saved in my pension pot?

If the value of your pension pot is due to exceed the Lifetime Allowance there will be a tax called a lifetime allowance charge on any excess over £1 million.  The charge is applied differently depending if you receive your pension as regular income or you take a lump sum.

If you take any lump sum above £1 million you will pay 55% tax on the excess.  Your pension provider will deduct the tax and you receive the balance.  If you want to take any excess over the Lifetime Allowance as income you will be charged 25%, on top of the usual income you will pay.  For example if you pay 40% tax and want to take £2,000 the provider would tax you 25% for the Lifetime Allowance.  You would be left with £1,500 which would then be taxed at 40% so you would pay a further £600, and receive £900.  In total you have paid 55% tax.

What should you do if you expect to exceed the Lifetime Allowance?

Simon Hawker, Financial advisor, and member of the St Albans financial planning team said:

‘Equity markets have risen strongly in the last few years and your total pension pot including all your money purchase pension schemes and final salary pension schemes may now be worth more than you thought. We recommend the first thing to do is work out the value of all your different pension pots so you can estimate your total pension value as soon as possible.’

Simon Hawker, pension adviser St Albans continued:

’After adding your pension pots together if you are close to the Lifetime Allowance we recommend you contact an independent financial adviser who can offer a pension review.  It is really important to remember that everyone’s circumstances are different and Independent financial advisers can review your pension pot within the context of your overall financial planning position which includes your other investments and protection.    If you are close to the Lifetime Allowance there are things you can do.  For example you could stop paying into your pension, consider retiring early, or take a lump sum from a pension scheme.  Remember that your pot will only be checked against the Lifetime Allowance when benefit crystallisation events occur.  This is either when you start drawing money from your pension pot or if you reach the age of seventy five without taking income from your pension.’

I have exceeded the Lifetime Allowance – what are my options?

Simon Hawker, independent financial adviser St Albans continued:  ‘There are things you can do now if you have exceeded the Lifetime Allowance.   In April 2016 the government introduced protection for anyone with a pension worth over £1 million.  If you haven’t made any pension contributions since April 2016 you may be entitled to apply for fixed protection 2016.   If you have made contributions since April 2016 you may be able to apply for ‘individual protection 2016.’  This allows you to apply for a personal lifetime allowance equal to the value of your pension on 5/4/16 but to a maximum of £1.25 million.’   

At Lonsdale Wealth Management our pension advisers are qualified to provide independent financial advice, having passed the Chartered Insurance Institute Diploma in Financial Planning & (RO8) Pensions Update Examination.  

We can review your individual financial circumstances and recommend the best course of action in relation to the Lifetime Allowance.  We offer a free initial consultation at our St Albans, Ware, Stafford, Barnet, Leeds / Bradford and Harpenden offices.  For more information contact us.

For more information review our Pension Planning information and read: Neil Homer, independent financial adviser Stafford - Does your final salary pension exceed the lifetime allowance?, Richard Porter, independent financial adviser St Albans – When to keep your defined benefit pension scheme; Richard Porter – Get pension advice at retirement; Deb Nolan independent financial adviser Leeds / Bradford – Will you have enough retirement income?

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